I wonder if the irs investigates defaulted accounts used as tax credits to see if all parties involved are claiming the legal amounts allowed? I bet oc's and ca's are abusing this deduction.
The Debt Buyers Association fought to NOT issue 1099c forms to debtors who had either paid nothing or had compromised their indebtedness. The IRS won. If they haven't tried to collect for 36 months, they've got to issue that 1099c. Which means the debtor will have to take the full amount of it into income, or try to mitigate it or eliminate it with a 982 form.
So once a 1099c is issued and the debtor includes the defaulted amount as income on their tax return the defaulted account can't be collected on in the future by ca's or jdb's?So if given the choice to pay back a 10,000 defaulted loan or to just pay the tax owed on a 10,000 defaulted loan what would you do?
Some states have case law that indicates that a 1099c is a signed writing of sufficient dignity to discharge a debt, although the IRS's belief is that a 1099c should have no effect on a state law claim. The court decision requiring the creditors to issue the 1099c forms indicates that the creditors should include a disclaimer when they send them regarding the ongoing collectability. Most states don't have case law regarding forms 1099c. As for what to do in a particular circumstance ... if the debtor is aware that the creditor is a compliant 1099c issuer (rules are so complicated and change so often that even the big boys can get caught not being in compliance), I would suggest analyzing whether a form 982 would be any help with respect to the income from all sources, deductions and credits (including the expected form 1099c) and the debtor's asset picture in the tax year that the 1099c is expected. In other words, if you expect an '07 1099c to reach you in early '08, do your taxes NOW to figure out whether you might be bettter off settling in the waning days of '07. A settlement agreement could include langauge that the debt is doubtful and disputed and no cancellation of indebtedness is to be imputed ... or could reduce the cancellation of indebtedness to an agreed amount because of the doubt and dispute. It's whatever you can negotiate. If you can't negotiate a deal that will make sense 100% measured against your tax picture, keep in mind that by settling you will also be removing litigation risk from your life ... and that has a value as well.
